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The book, O



 

 
 


 by Richard Florida, was a great book because it examined the economy from a

holistic perspective. It did not just look at today¶s crisis in a vacuum and give a surface

explanation as to how we got to this point or a surface comparison to other depressions

and/ or recessions, but Florida went deeper and used a ³back to basics´ approach to

systematically examine the main elements of our economy and how they affect how we

live, work, and play. Specifically, Florida, in O



, shows how major shifts in

the main elements of our economy caused major shifts in our thinking paradigms

affecting how we lived, worked, and played, and how a major shift is occurring now that

will affect our living and working in the future.

So what does this mean to the Real Estate Developer in the current economic

climate of dried-up credit, oversupply of residential housing, underwater residential

values, and famine-like conditions in major ³boom-towns´ of the past? O





offers real estate developers an opportunity to get back to the fundamentals of real estate

developing. It offers them an opportunity to p
 about the who, what, when, where,

and why of developing real estateinstead of just being on a constant treadmill of

developing.
 It offers three key lessons for real estate developers: (1) the current crisis is not

simply a real estate recession that we should just wait to blow over and then get back to

developing real estate the same way we¶ve done over the past several decades; rather it is

a part of a larger economic reset; (2) changes in consumption patterns will affect housing

patterns; and (3)the Move from an Agricultural Economy to a Manufacturing Blue-Collar

based Economy to a Professional, Technical, and Creative Economy Affects Housing

Patterns.

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The key lesson for residential real estate developers lies in this common and age-

old saying ³As a Man Thinketh so is He´. One might rephrase this for residential real

estate developers and state ³As a Real Estate Developer Thinketh so does he Develop´.

The main premise Florida successfully tries to impart is that the current crisis is not just a

real estate recession that will blow over soon and we¶ll be back to the good ole days, but

that it is a part of a larger economic transformation, a reset. This represent a major

paradigm shift in the thinking of most residential real estate developers today most of

whom were not alive during the First or Second Reset to remember its effects on housing

and most of whom have not had to be ³real´ students of real estate development from a

historical context.

Florida states in O



 that great resets

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This changes the focus of the residential real estate developer to a more holistic

viewpoint; one that he/she has not had to take notice of for the last couple of decades.

The market studies and demographic patterns are more relevant and necessary in today¶s

client for real estate developers in order for them to adequately assess their risks and

meet the growing societal needs and changing tastes.

The new megaregions that Florida discusses in O



, will present new

opportunities for developers that they will be ill-equipped to seize unless they

understand not only where the megaregions will be located but also who will live in the

megaregions. Also with home ownership declining in the minds of many, particularly

young professionals, as a necessity, and shifting to a mentality where it¶s OK to rent,

real estate developers may have to shift the product and compete in the multi-family

market typically reserved for large institutional developers. The key lesson again here is

for residential real estate developers to shift their thinking about the current economy

and real estate¶s future place in it.

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Another key lesson for real estate developers in The Great Reset is that

consumption patterns affect housing patterns. A key feature of the First and Second

Reset was that they brought about shifts in consumption that fueled rising industries and

affected housing patterns.

During the First Reset, and specifically 1874, the average family spent 56 percent

of its budget on food; by 1901 this number had fallen to 47 percent. This freed income to

be spent on other items. By the turn of the 20th century, the US government added three

new categories (1) home furnishings, (2) health care, and (3) recreation, to its traditional

categories of food, clothing, and shelter when surveying household spending.

By 1950, during the Second Reset, the average family spent about one-third of

their budget on food and by the mid-1980¶s less than one-fifth of the family¶s budget was

spent on food. Spending on basic needs i.e. food, clothing, and shelter, dropped from

three-fourths of a family¶s budget during the First Reset to less than half by 1960. This

opened up opportunities for businesses to create new products and industries to capture

that consumer spending.

At first that excess consumer spending was focused on buying items that made

manual tasks easier i.e. washing machines, dryers, refrigerators, etc. For housing, homes

began to be built with indoor plumbing i.e. bathrooms, then air conditioning. Then new

inventions in communications shifted our spending to radios, televisions, phones, and

other electronic equipment. Until consumer spending was beyond just necessities,
comfort, and enjoyment, it became focused on bigger, better, more luxurious. Our things

became our identity.

For Housing, this meant that not only did our appetite for the suburban homes

increase, but we wanted bigger and better than our friends and colleagues. With this

mentality, residential real estate developers ran to fill this demand and market to it,

houses that were bigger in size and more luxurious finishes i.e. several bathrooms,

expansive closets, stone countertops, etc. They developed and marketed second homes

on the beaches, on the riverfronts, and in artsy districts playing to the consumer¶s desire

and willingness to spend more of their income on housing and worse yet to leverage their

future earnings and projected future values on housing.

In this current Reset, a shift in consumer spending is also emerging. Whether by

necessity, caution, or both, consumers are spending less. In O



, Florida

noted that, in November 2009, more than a year after the financial markets collapsed,

consumer spending was a full 20 percent lower than a year before. And this spending

was down across all age groups from the Millennials, Generations X and Y, Boomers,

and Seniors. People are now downsizing their big houses and big cars for smaller ones.

Evidence of this also lies in the fact that the median size of a new single family

home decreased in 2008 for the first time in more than a decade. People are spending

less on transportation by choosing alternate modes of transportation, carpooling, or just

driving less. This means residential real estate developers will not only have to rethink

their actual product, but where to put the product.

    
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In O



, Florida discussed the how the type of economy we had

affected the types of housing we lived in. He began by stating that we had an economy

based on agricultural during the mid-nineteenth century. People lived on farms and

farmed the land. Their housing was simple and sufficient to allow families to live and

work the farm. They built their own housing and it usually consisted of a complex that

included a barn, fields, stables, and/ or orchards. Their work and home were physically

connected. Few lived in urban centers. In 1860, about 80% of the people in the United

States lived in rural areas and 20% lived in urban centers.

With the First Reset occurring as a result of the economic crisis of 1873, major

industries such as railroads, petroleum, and steel consolidating, and major innovations

occurring in electricity, communications, and transportation, people began to move to the

urban cities, such as New York, Philadelphia, and Chicago. The housing built during this

time was compact and simple to enable workers to live and work. Workers tended to live

in compact housing i.e. slums while professionals, management, craftsman, and artisanal

producers either lived on top of their shops and offices or had offices in their

homes.Where one worked and lived was still intertwined.

As transportation infrastructure improved, people began to move further from

their work. There began a physical separation between one¶s house and one¶s work.
This move mostly occurred along class lines, because there were basically two classes

during this time, the upper professional management ownership class and the lower

working class. There was no middle class. The upper class first began to establish

suburbs along the streetcar lines that developed while lower-class workers were crammed

into tenement housing. At the same time factories began to expand as transportation

expanded thus expanding the spatial reach of the urban cities.

With the Second Reset, manufacturing increased exponentially because of the

war, the use of cars and trucks exploded, and more and more people moved away from

the dense and cohesive urban cities to find more privacy and freedom. This move was

not merely the upper-class, but the middle-class that had developed due to the passage of

the Wagner Act which prohibited unfair labor practices and gave workers the rights to

organize and bargain collectively. With the passage of the act, wages increased for

factory workers as the economy recovered from the Great Depression and especially

during the years after World War II. This increase allowed factory workers to escape to

the suburbs as well.

Single family homes in suburbs across the United States began to develop as the

government began to focus on home ownership for average working Americans, as the

FHA was established to guarantee mortgages, and as roads and highways spread. Real

estate developers built single family housing in suburbs to meet this increasing demand

and by the early 1960¶s the population of the suburbs had exceeded that living in the

cities.
 With the Third Reset, which we are currently in and which will span at least two

or three decades based on similar timeframes for the First and Second Reset, we¶ve

begun to shift froma manufacturing blue-collar economy to a professional, technical, and

creative economy; from an economy based on making things to one that revolves around

knowledge and creativity. Florida noted in O



 that the ³United States added

some 20 million jobs in the creative, professional, and knowledge sectors of its economy

between 1980 and 2006´. Wages in these knowledge jobs amounted to half of all US

wages and salaries. This same trend is taking hold in the advanced countries of northern

Europe, Canada, Australia, New Zealand, and Japan, where the ranks of creative workers

make up 30 to 40 percent of the workforce.

Not only will this trend of growing professional, technical, and creative jobs

continue, but routine service jobs, which are traditionally low paying, will increase as

well. Currently routine service jobs account for 45 percent of jobs, 60 million jobs in all.

Creative jobs account for 31 percent, and working-class jobs account for 23 percent of

jobs. According to projections by the Bureau of Labor Statistics, between 2008 and

2018, the United States will add 15.3 million new jobs. Of this amount 6.9 million will

be professional, technical, and creative jobs, 6.9 million will be service, administrative,

and clerical jobs, and only 1.5 million will be working-class jobs mainly in construction

and transportation.

What does this imply for residential real estate developers? It signals that unless

the wages of the service sector are elevated, the wages of the professional, technical, and
creative class are lowered, or another sector is created targeting the middle-class, the

middle-class willdisappear leaving developers with two target income groups that will

drive demand and alter housing patterns.